Ben Van Miltenburg and Rose Van Miltenburg v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2691

Beaubier, T.C.C.J.:—These matters were heard on common evidence on July 23, 1993 at London, Ontario. They are appeals pursuant to the informal procedure of this Court. The only witnesses were the two appellants.

At the commencement of trial the agent for the appellants withdrew a claim of discrimination arising from an assessment determined as the result of a non- arm's length transaction.

Pursuant to the pleadings the solicitor for the respondent and the agent for the appellants treated the assets in question as being equally owned by the two appellants. The evidence of the appellants did not affect the assumptions of the Minister of National Revenue. No written agreement, transfer or bill of sale between the parties to the transaction was filed in evidence. The assumptions are identical in respect to each of the appellants. They read as follows in respect to Ben Van Miltenburg:

(a) the appellant is a 50 per cent partner with his spouse, Rose Van Miltenburg, in a family dairy and swine farm which was purchased in a non-arm's length transaction;

(b) the appellant's purchase price for the farm property was set at market value, and the vendor sheltered most of the resulting taxable capital gain from income by availing himself of a capital gains deduction;

(c) the total capital cost of the business portion of depreciable farm assets acquired in the 1988 taxation year amounted to $71,364, and the capital cost allowance on all available depreciable farm assets totalled $9,012 in the 1988 taxation year and $10,856 in the 1989 taxation year, with the appellant's share being 50 per cent thereof (see attached Schedule A, Schedule B, and supporting capital cost allowance schedules for the 1988 and 1989 taxation years);

(d) for amortization purposes, the appellant's share of the capital cost of the milk quota (cumulative eligible capital) acquired from his father in the 1988 taxation year amounted to $12,304 and the amount of amortization allowed thereon totalled $861 in the 1988 taxation year, and $1,326 in the 1989 taxation year, after further additions to the cumulative eligible capital amount in that year, with the appellant's share being 50 per cent thereof (see attached Schedule C and the supporting capital cost allowance schedules for the 1988 and 1989 taxation years).

Respecting the depreciable assets, subsection 13(7) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") sets out various rules in relation to the capital cost of depreciable property. Subparagraph (e)(i) provides that where a taxpayer has acquired a depreciable property of a prescribed class from a non-arm's length resident person and where other conditions are met, as in this case, then the cost to the taxpayer of that property is an amount deemed by that subparagraph. By virtue of subsection 251(1), related persons are deemed not to deal at arm's length. Therefore, prima facie, the provisions of paragraph 13(7)(e) apply in respect of the depreciable property of a prescribed class acquired from Ben Van Miltenburg's father.

The appellants argue that the buildings they acquired were Part XVII assets and were not assets of a prescribed class as that term is used in paragraph 13(7)(e). Paragraph 1102(1)(g) of the Income Tax Regulations (Regulations) XI, which governs the depreciation of depreciable property of a prescribed class, provides that" [t]he classes of property described in this Part and in Schedule II shall be deemed not to include property. . .in respect of which an allowance is claimed and permitted under Part XVII”. However, this does not assist the appellants who acquired the farm property in 1988; paragraph 1702(1)(k) of Regulations XVII provides that "[n]othing in this Part shall be construed as allowing a deduction in respect of a property . . . that was acquired by the taxpayer after 1971".

Neither is the Income Tax Application Rules, 1971 (ITAR) subsection 20(1) of any assistance in this respect. ITAR subparagraph 20(1)(b)(ii) deems certain persons to have acquired depreciable property prior to 1971, but it expressly provides that it is only "for the purposes of [ITAR subsection 20(1)]", and not for the purposes of Regulations XVII or Regulations XI. Since gains accruing prior to V-Day are not taxable, such gains are not permitted to be taken into account in establishing the cost basis against which a subsequent purchaser may claim capital cost allowance. ITAR subsection 20(1) excludes such gains from being included in the capital cost of depreciable property by deeming the cost to the purchaser to be equal to the proceeds deemed to have been received by the vendor.

Thus paragraph 13(7)(e) which deals with non-arm's length dispositions, is not otherwise overridden. ITAR subparagraph 20(1)(b)(i), which deems the capital cost to the acquirer, includes the phrase "for the purposes of section 13 . . . and any regulations made under paragraph 20(1)(a)".

With respect to the milk quota, subsection 14(3) sets out the rules for calculating the eligible capital expenditure which a taxpayer may claim in respect of eligible capital property acquired from a non-arm's length party. The figure computed thereunder takes into account amounts claimed by the transferor pursuant to section 110.6. The schedules annexed to the Minister's replies show that the milk quota was considered to be eligible capital property and that Ben Van Miltenburg’s father had claimed a capital gains deduction pursuant to section 110.6. As a result, the basis on which the appellants' eligible capital expenditure was computed was severely reduced from the actual cost of acquiring the quota. However, the appellants maintain that ITAR section 21 overrides subsection 14(3) and that pursuant to this transitional provision, a milk quota is not eligible capital property, but rather, goodwill or some other “nothing”.

A consideration of the provisions of the Act, the transitional rules and the jurisprudence suggests that the quota is eligible capital property in respect of which subsection 14(3) applies.

Pursuant to subsection 248(1) of the Act, eligible capital property has the meaning assigned by section 54. Paragraph 54(d) in turn provides that eligible capital property of a taxpayer means any property, a part of the consideration for the disposition of which would, if he disposed of the property, be an eligible capital amount in respect of a business.

According to subsection 248(1), eligible capital amount has the meaning assigned by subsection 14(1), namely "an amount determined in respect of a business of a taxpayer under subparagraph (5)(a)(iv)". This takes into account an amount which the taxpayer is or may be entitled to receive as a result of a disposition occurring after the taxpayer's "adjustment time", "where the consideration given by him therefor was such that, if any payment had been made by him after 1971 for that consideration, the payment would have been an eligible capital expenditure . . .". The "adjustment time” is defined pursuant to paragraph 14(4)(c) to be the time immediately after the commencement of the taxpayer's first fiscal period commencing after 1987 in respect of the business. Since the purchase occurred after January 1, 1988, it was purchased after the "adjustment time” and could only be disposed of thereafter.

Subsection 248(1) provides that eligible capital expenditure has the meaning assigned by subsection 14(5). According to this latter subsection, eligible capital expenditure generally means “the portion of any outlay or expense made or incurred by [the taxpayer], as a result of transactions occurring after 1971, on account of capital for the purpose of gaining or producing income from the business Paragraph 14(5)(b) also excludes many types of expenditures, including expenditures made in respect of tangible property or for intangible property that is depreciable property as this latter phrase is defined in the Act. But for ITAR section 21, the quota appears to be eligible capital property.

ITAR section 21 purports to deal with goodwill and other "nothings". It deems the vendor to receive a varying percentage of the proceeds actually received, depending on how soon after 1971 the goodwill or nothing was sold. After 1984 all of the proceeds actually received are taken into account in computing the vendor's income. ITAR subsection 21(2) then considers the proceeds deemed to have been received by the vendor in restricting the capital expenditure of a non-arm's length purchaser.

ITAR subsection 21(1) adjusts the amount which the vendor "has or may become entitled to receive" for the purpose of computing the purchaser's eligible capital expenditure pursuant to subsection 14(3) of the Act. Subsection 14(3) is not overridden by ITAR section 21, but is supplemented by it.

ITAR section 21 deals, inter alia, with "government rights”, a term defined in paragraph (3)(a) of that rule. In Reynolds v. M.N.R., [1989] 2 C.T.C. 2242, 89 D.T.C. 485, Judge Tremblay held that a milk quota issued by the Régie des marchés agricoles du Québec is a government right for the purposes of ITAR section 21. A review of the Farm Products Marketing Act, R.S.O. 1980, c. 158 as amended [S.O. 1988, C. 13, s. 2], which was in effect at the time in question, indicates that it is similar in effect to the Farm Products Marketing Act, R.S.Q. 1977, c. M-35 reviewed by Judge Tremblay. Thus a milk quota is both a government right and an eligible capital property. That being so, the Minister is required, pursuant to subsection 14(3), to deduct amounts which may" reasonably be considered to have been claimed” by the vendor as a deduction under section 110.6.

In these circumstances the appeals are dismissed.

Appeals dismissed.